Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
-Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. should increase gross revenues by at least $5,000 per year. The cost of these prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is:

Question

Quizplus · Accepted Answer

The annual net cash inflows from the auto can be calculated as follows: 
Gross revenue increase: $5,000
Less: Cost of prescriptions: $2,000
Net cash inflow: $3,000

Using the straight-line method, the annual depreciation of the auto can be calculated as follows:
($9,000 - $3,000) / 6 years = $1,000 per year

The payback period can be calculated by dividing the initial cost of the auto by the annual net cash inflow:
$9,000 / $3,000 = 3 years.

Therefore, the correct answer is B) 3.0 years.

Reference: 10-12 Hanley Company Purchased a Machine for $125,000 That Will Be